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2017-11-14 | Jason Goepfert | Comments

For those who don’t follow the premium Twitter account, which you have access to if you’re receiving this message, following are some of the studies and indicators that have been posted over the last couple of days. If you’d like to follow the Twitter account, please request to follow @SenTrader_Prem on Twitter then send an email […]

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2017-11-09 | Jason Goepfert | Comments

For those who don’t follow the premium Twitter account, which you have access to if you’re receiving this message, following are some of the studies and indicators that have been posted over the last couple of days. If you’d like to follow the Twitter account, please request to follow @SenTrader_Prem on Twitter then send an email […]

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If you've never tried the service before, then there is no charge for the first 30 days. Then pay as little as $1.59 per trading day for access to our award-winning research. There are three convenient billing options: $39/month, $109/quarter or $399/year.

2017-10-17 | Jason Goepfert | Comments

With yet another day of almost no volatility, signs are piling up that things are about to change. The caveat here, of course, is that the signs piled up several times before, and we either got a limp response or none at all.

Among these signs, we’re seeing that “smart money” hedgers are net long VIX futures to a record degree.

At the same time, traders are pouring into volatility products, which has not been a contrary indicator. Usually, this is the “smart money” and we typically see volatility tick higher after inflows.

The Term Structure of the VIX is starting to normalize after being suppressed to a record degree. The 10-day average is just emerging out of extreme territory, meaning that options traders are just now starting to price in the possibility of rising volatility in the nearer-term compared to what they have been. Even during the irrepressible rally in recent years, this has often led to a negative return in the S&P.

Anecdotally, it’s interesting that there is news about Wells Fargo have to pay out damages for having the audacity to steer clients into some of these volatility ETFs. They are exceptionally poor products and not suitable for just about anyone, but that’s not the point. The point is we wouldn’t see this during a time of normal market movements.

Besides the iPath S&P 500 VIX ETN, other products that Wells Fargo doesn’t offer include the iPath S&P 500 VIX Mid-Term Futures Exchange-Traded Note, which has plunged more than 40% this year, and the ProShares VIX Short-Term Futures Exchange-Traded Fund, which is down about 65% in 2017.

Whether hedge funds can be considered the smart money is up for debate, but they’re also starting to more aggressively move into the space that those Wells customers have been so burned on.

That should be music to the ears of hedge fund managers like Brevan Howard. The firm is expected to start a long volatility fund soon, people with knowledge of the matter said. Funds planning similar launches this year include Astrid Hill, founded by Millennium Management alumnus Arun Singhal in Singapore, and One River Asset Management, a manager of $700 million led by Eric Peters in Greenwich, Connecticut, according to Singhal and One River marketing materials obtained by Bloomberg News.

They’re doing this after the tail-risk category has been among the worst categories for years on end.

While the funds surged 46 percent as a group during the crisis in 2008, they’ve lost 9.1 percent this year and are down 17 percent over the last five years, according to Eurekahedge Pte. The five-year drop is the second worst among 20 categories after tail risk, a supercharged cousin of long volatility that bets on extreme market swings.

These are not necessarily new developments, and like I said, they’ve failed at other points in 2017, or at least didn’t lead to reactions like they did in the past. So it’s more of a spidey-sense that this time might be different.

Like the Wells Fargo customers have discovered, though, there isn’t a pure, clear-cut way to bet on the potential for rising volatility. And like we’ve been noting in recent reports, momentum in stocks has been remarkable, on a par with only a couple of times in history, and those both led to further gains over the next six months before any kind of notable correction.

So that leaves us with a confusing backdrop.

  • There is an extremely high probability the VIX will spike at some point in the coming months.
  • But that goes against the upside argued by momentum and seasonality – it would be rare to see a major pullback during this time of year, after seeing this kind of momentum.
  • But seasonality isn’t perfect – it bucked the usual summer/September pattern so perhaps some of that positive drift has already been used up.
  • And a historic percentage of our indicators are showing excessive optimism.

So what to do? I am personally holding a very high amount of cash, which has been a major drag. I’m not willing to go outright short the market, due to the positives of momentum and seasonality. But I do think there is the potential for a spike and would like to participate. Volatility funds and poor choices since the time frame is uncertain.

About the best basic strategy (for me) is a straddle on the S&P. That’s buying an at-the-money call and put option of the same strike and expiration. With volatility so low, it’s a relatively cheap trade that will constantly bleed value unless stocks make a big move – up or down – before expiration. Since I believe both upside and downside are relatively limited, I don’t think a strangle, which uses out-of-the-money options, would pay off.

Using March 255 options, the straddle would lose money as long as SPY was between 241 and 269 at expiration. That’s more than a 6% move in the next five months. I don’t think we’ll see a sustained move greater than that in either direction, so my plan would be to sell the call option if we rally in the coming month(s) and be left with a “free” put option, or to sell the put if we finally do see a pullback and be left with a “free” call option.

2017-10-11 | Jason Goepfert | Comments

With the drop in the Mexican peso over the past month, the iShares Mexico ETF, EWW, has sold off and has triggered an interesting setup.

The fund is showing up on the ETF Sentiment & Trend screen as showing pessimism despite being in an uptrend (above its 200-day average).

The one-day Optimism Index is extremely low, and that’s been the case for days, even weeks. The 3-day average is below 12, a reading that we don’t see very often. Most of the moving averages from a few days to a few weeks are now showing extreme pessimism. That’s happening right as the fund has declined toward its 200-day average and potential support from its prior breakout level. I don’t put a lot of weight on that, for the record.

In the past, when the 3-day average dropped to such a low level when EWW was in an uptrend, it rallied over the medium-term, though there was some short-term volatility. According to the Backtest Engine, the average return over the next 50 days was nearly 8%.

Another (very) minor positive is seasonality. EWW has had a tendency to bottom around this time of year and march higher into year-end.

Now here’s the bad part. Because of currency issues, EWW has a high correlation to the direction of the peso. If the peso continues to decline, EWW almost certainly will, too. And “smart money” hedgers are extremely short the peso, unlike early this year when they were long. EWW’s best rallies have occurred when hedgers were net long or not holding a large short position. That is definitely not the case now. This is a HUGE headwind and suggests EWW could/should continue to decline.

In terms of a potential trade, I like the factors that have lined up on the upside. But because of the hedger position, which I do not like at all, I don’t want to tie up much capital or risk a lot of the peso continues to slide and EWW just slices right through its 200-day. That’s a higher-than-comfortable probability since the hedger positions have been such a consistent indicator over the years. But the “pessimism-in-an-uptrend setup has been consistent enough to take a shot, so I’m going to buy January call options on EWW at the $53 strike, a small cash outlay with limited risk should the setup fail. That gives it enough time to work. If it happens to work right away, I’d like take profits quickly due to worries about those hedger positions.

2017-10-10 | Jason Goepfert | Comments

With the newest version of the Backtest Engine that Eric created, now we can see how almost any indicator we cover has impacted market performance going forward, including when that market was in a bull or bear market.

This updated Engine allows users to change the markets tested and whether they’re above or below various moving averages.

The video below walks through a couple of tests using the spread between Smart and Dumb Money Confidence. We think it’s a great tool and hope it’s useful to you!

2017-10-04 | Jason Goepfert | Comments

For those who don’t follow the premium Twitter account, which you have access to if you’re receiving this message, following are some of the studies and indicators that have been posted over the last couple of days.

On Wednesday, SPY notched 7 higher closes and a new high, which has led to short-term weakness.

Same goes for times when it rallies for multiple days on below-average volume and tiny intraday ranges.

Longer-term, though, the S&P has been up for the last 6 months. This is just another way of looking at some of the other momentum-based studies we discussed the other day.

In bonds, Bloomberg reported that their clients had greatly expanded their short bets. Their overall net position is now 40% short, the most aggressive bet against the market since 2005. Other times when their clients were 20% net short were pretty good for funds like TLT (but not perfect).

It’s odd to see such an extreme reading now when other indicators of positioning, like the Commitments of Traders data, still show speculators heavily long the note and bond futures contracts. That data typically follows the JP Morgan indicator so the fact that they’re diverging now makes it harder to place a lot of weight on this sign of pessimism now.

If you’d like to follow the Twitter account, please request to follow @SenTrader_Prem on Twitter then send an email to admin at sentimentrader dot com to let us know your Twitter account name.

2017-09-26 | Jason Goepfert | Comments

Oil and related stocks have had quite a run over the past few weeks. The oil and gas explorer ETF (XOP) has been up 12 days in a row for the first time ever. Even more established funds like XLE are on a near-record run after the sector got washed out on August 18 with more than half of the stocks plunging to a 52-week low.

As a result of the run, energy ETFs keep showing up in our screens. XOP, for example, is being highlighted as having a negative bias in the seasonality, trend, and exhaustion screens. That means that the Optimism Index for the fund is extremely high given poor seasonality (for a little while) and an overall long-term downtrend. It’s also showing an almost maxed-out daily reading on the Optimism Index when its 10-day average was already high (showing potential buying exhaustion). All of those tend to lead to below-average returns over the next several weeks.


Also notable is that the Risk Level on crude oil is at an 8. Using the Backtest Engine, we can see that crude has had trouble maintaining upside momentum when the Risk Level was this high.

The oil stocks have a high positive correlation to crude, so if oil does stumble, the oil stocks will too.

So what to do? How to actually trade this? There is no right answer, since everyone has different risk tolerances, experience, etc. All I can do is show what I’m doing.

There are hundreds of ways to structure a trade to take advantage of an outlook that’s neutral-to-bearish on an ETF. I could short it, buy a put, buy an inverse fund, sell calls, short crude futures, among others. Those are all relatively high risk, and more appropriate if one has an outright bearish outlook. I don’t, since there seems to be a decent shot that oil and the oil stocks are embarking on a new sustained bull market. A major buying thrust like we’re seeing now is often a harbinger of a larger tend change and I don’t particularly feel like getting my face ripped off.

My outlook is more of a “due for a rest” one. Almost always when there is a push like this, there is some short-term back-and-forth that gives back some of the gain. And funds like XOP are now starting to push up against what some would consider resistance – former lows and a 38% retracement of the decline so far this year.

So the outlook would be that XOP won’t get much above 34.50ish in the coming weeks, and is more likely to flatten out and give back some of its gains over the coming weeks. One of the better strategies to use for that outlook is selling call spreads or buying put spreads. I prefer to let time decay work for me instead of against me, so I’m going to short calls.

To be honest, I’m bad at structuring the ideal trade. I rely on option strategy screeners from Bloomberg and brokers like Fidelity, Schwab, and E-Trade to help find the strikes that are least likely to show large losses, and most likely to show a profit given a neutral-to-bearish outlook. Based on those, I’m looking to buy the October 35.50 strike and sell the 31.50. It’s profitable if XOP stalls out and declines a bit over the next several weeks (would prefer to have a little more time but don’t want to go out to November). I don’t think the “max gain” of about $244 per net contract is in play, and the maximum risk of about -$155 would occur if XOP is above 35.50 at expiration.

As a reminder, some of this was already posted on the private Twitter feed, which you have access to as a Premium tier member. Just request to follow @SenTrader_Prem and let us know so we can approve your access.

2017-09-21 | Eric Brown | Comments

Currently, there are 9 Stock indicators at Pessimistic Extremes and 38 Stock indicators at Optimistic Extremes.

The tables below display stock market indicators that are at Very Optimistic, Extremely Optimistic, Very Pessimistic or Extremely Pessimistic levels. Note: These tables contain only indicators from the Stocks section of the site. For the tables below, you can click through to each chart by clicking on the Chart name.

Pessimistic Extremes

Chart Last Close Last Update Sentiment
ISE Call/Put Ratio
Speculators Combo
Russell 2000 Mini Hedgers Position
Number of IPOs
Rydex Energy Assets
Rydex Energy Services Assets
Small Spec Index Position
DIA Open Interest Ratio

Optimistic Extremes

Chart Last Close Last Update Sentiment
% Showing Excess Pessimism
VIX Term Structure
SKEW Index
Small Trader Call Buying
OEX Open Interest Ratio
NYSE High/Low Ratio
NASDAQ High/Low Ratio
AAII Bull Ratio
AAII Allocation – Cash
Equities as % of GDP
Small Business Optimism
DJIA Hedgers Position
DJIA Mini Hedgers Position
DJIA Combo Hedgers Position
Odd Lot Purchase Percentage
Mutual Fund Cash Level
Equity / Money Market Asset Ratio
Retail Money Market Ratio
NYSE Available Cash
Rydex Ratio
Rydex Money Market %
Rydex Total Bull Assets
Rydex Total Bull / Bear Ratio
Rydex Biotechnology Assets
Rydex Consumer Products Assets
Rydex Financial Services Assets
Rydex Technology Assets
Conference Board – Stocks
University of Michigan – Stocks
Volatility ETF Fund Flow
% Showing Excess Optimism-Pessimism Spread
QQQ Open Interest Ratio
IWM Open Interest Ratio
CNN Fear Greed Proxy
Short-Term Risk Levels
Consumer Confidence – Stocks Up
Consumer Confidence – Stocks Down

2017-09-16 | Jason Goepfert | Comments

We’ve had some requests to post updates on a few popular models from the site, so below are current snapshots of the spread between our Smart Money and Dumb Money Confidence, the Medium-Term Optimism Index, and a proxy of the CNN Fear & Greed model.

All three reached modest levels of pessimism in mid-to-late August for the first time in a year. That proved to be enough for the dip-buyers as we’ve quickly rebounding right back to new highs. Because of the speed of the move, the models are showing that sentiment hasn’t had time to catch up to the price move, except for the CNN model which is just now entering “excess optimism” territory.

From our Backtest Engine, we can see that over the past few years, when the CNN model was in “excess optimism” territory, the S&P 500 averaged a return of 0.23% over the next month, below average for that time span. And it’s well below the 0.95% average return when the model was not in extreme territory (below 70).

2017-09-11 | Jason Goepfert | Comments

Over the past few months, financials have gotten hit hard. During the past week, fewer than 20% of members in the sector were trading above their 50-day moving averages, a deeply oversold reading, especially during the past 8 years of this bull market.

That weakness has pushed Financials to be the weakest among major sectors.

We can see that over the past year, such a reading was seen only one other time, right before the spring rally.

Using the Backtesting Engine, it’s apparent that when the sector first emerged from a deeply oversold breadth reading (fewer than 25% of members above their 50-day moving averages), buying interest tended to persist. Two weeks later, Financials added to their gains 80% of the time.

During a bear market, the stocks often see almost immediate selling pressure after emerging out of oversold territory, so that kind of behavior is always something to watch for.

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